Brazilian Real Climbing

Highlights include TAM (TAM - Analyst Report), AmBev (ABV - Analyst Report), Net Servicos (NETC - Analyst Report), Vivo (VIV - Snapshot Report) and Sabesp (SBS - Analyst Report).

Brazilian Central Bank buys over US$1 billion in the cash market, but the real ends up higher

As we have said last week, the Brazilian real is heading on a one-way street up against the U.S. dollar; we see this as a lasting trend and not as a short-term correction. As we also said here, the Brazilian Central Bank policy of accumulating reserves is a very good one, but it will not prevent the appreciation of the Brazilian real.

In the next few days, the Brazilian currency will test the psychological level of BRL/USD 2.00, and we expect it go through it without major problems. Yesterday the Brazilian BRL/USD reached 2.02 and it did not go further because the Brazilian Central Bank did all it could to prevent a major appreciation.

Just yesterday, the Brazilian Central Bank acquired US$1.185 billion. The Brazilian Government and export companies would like to prevent an appreciation of the real past BRL/US$ 2.00. It seems a more difficult task every new day.

As we said last week, there is just one solution for the currency appreciation problem in Brazil: lower interest rates. After three aggressive cuts this year, current rates are at 10.25% per year -- still too high.

We were expecting rates to reach 9% by the end of 2009. Now we are convinced that this is not realistic. Interest rates should be below 9% -- our new guess is 8.5% by the year end. Nevertheless, the Brazilian real will continue to appreciate in the very short-term.

In such an economic environment, we continue to recommend companies focused on domestic demand, particularly the ones that would benefit from the currency appreciation. We like TAM (TAM - Analyst Report), AmBev (ABV - Analyst Report), Net Servicos (NETC - Analyst Report), Vivo (VIV - Snapshot Report) and Sabesp (SBS - Analyst Report).